ECB emergency meeting, anti-fracture and gas disturbance instrument -by Ecork

Euro Weekly Basic Forecast: Bearish

  • Ukraine and Moldova are recommended to run for the EU while Georgia requires more reforms
  • The results of a “technical problem” are apparent in Germany, Italy and France, among the countries that get less gas from Russia
  • The European Central BankUnfounded anti-fragmentation tool mention sent bond margins higher – emergency meeting called to redirect APP reinvestments to problem areas

Source: TradeFifthiew, prepared by Richard Snow

The European Union welcomes Ukraine and Moldova as candidates to join the European Union

European Union Commission President Ursula von der Leyen It welcomed the candidacies of Ukraine and Moldova as both countries quickly applied for membership shortly after Russia’s invasion of Ukraine. While the process may take years to complete, states are a step closer to ‘living on The European dream.

President Volodymyr Zelensky tweeted, “It is the first step on the path to membership in the European Union that will surely bring us closer to victory.”. Georgia, which has also applied for EU membership, has not yet been recommended as a candidate as it is said to have to meet more conditions.

Gas linked to the EU via pipelines is less than required flows

Germany, Italy, France and Slovakia are among the countries that received much less gas than demanded via the Nord 1 pipeline. Italy and Slovakia reported less than 50% of their normal volumes. Germany reported getting 60% less gas from Russia than what was agreed. The Nord 1 pipeline accounts for 40% of the Russian pipeline’s supply to the European Union.

Italian Prime Minister Mario Draghi viewed the shortage with skepticism, accusing Russia of using its gas supplies for political reasons. Russia identified the problem as the slow return of equipment that was sent to Canada for maintenance.

The shortage comes at a somewhat inopportune time as southern Europe faces a heat wave that requires more gas to cool off. In addition, Europe is critically storing gas for the cold winter period and is currently behind the 5 year average. Gas shortages and rationing are a topic that surfaced during the early stages of the war and could hamper the eurozone (and the euro) economy if such drastic measures are needed.

Fundamental Outlook for the Euro: ECB Emergency Meeting, Anti-Corruption Instrument &  gas disturbances

The European Central Bank is tight on the anti-breakout bond instrument, an emergency meeting is required

Christine Lagarde, President of the European Central Bank, mentioned a special anti-fragmentation tool that would ideally reduce bond market volatility as the bank raises interest rates. However, when asked about it, Lagarde chose not to give any details, leading to highly undesirable moves in the bond market that the Commission sought to avoid.

In an effort to tackle the unexplained moves in the bond market, the European Central Bank called an emergency meeting with many speculating that the Governing Council will unveil the aforementioned tool. Instead, the Board of Directors agreed to direct the reinvestment of the APP to the markets that demand the most attention. Part of the statement reads as follows:

“The Governing Council has decided that it will apply the flexibility to reinvest upcoming recoveries in the PEPP portfolio, with the aim of maintaining the operation of the monetary policy transmission mechanism, which is a prerequisite for the European Central Bank to be able to fulfill its price stability mandate.”

The riskiest Italian bonds (BTP) and the safest German bond spreads were created below, revealing an overall bullish trend that culminated in a rally after the European Central Bank’s June 9 meeting. Bond yields in countries surrounding the European Union: Portugal, Italy, Greece and Spain in particular may see widening spreads as the European Central Bank attempts to raise in July and September.

BTP- Bond Blast Spreads in Response to Narrow Lip ECB

Fundamental Outlook for the Euro: ECB Emergency Meeting, Anti-Corruption Instrument &  gas disturbances

Source: TradingView, prepared by Richard Snow

Markets priced a rise of 25 basis points and 50 basis points by September, which means July’s record high of 25 basis points is likely to go ahead as markets expect inflation expectations to worsen, justifying a 50 basis point rise in September.

Implied market expectations across money markets

Fundamental Outlook for the Euro: ECB Emergency Meeting, Anti-Corruption Instrument &  gas disturbances

Source: Refinitiv

Major risk events next week

Scheduled risk events are fairly quiet compared to the bumper week just passed, as we saw movement from 2 of the 3 major central banks along with other important sentiment data.

Next week, we see EU consumer confidence along with the flash Germany and EU PMI data for June, as well as the European Council meeting. Friday’s round up the week with the Ifo Business Climate Report.

Fundamental Outlook for the Euro: ECB Emergency Meeting, Anti-Corruption Instrument &  gas disturbances

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Written by Richard Snow for

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